As of 1 January, the Australian Prudential Regulation Authority (APRA), the financial regulator is lifting restrictions on interest-only residential lending in order to steady Australia’s declining property market.
Previously, APRA executed restrictions in March 2017, forcing lenders to reduce new interest-only lending down to 30% of the home loans they issued.
But with Australia’s housing market experiencing its worse declines since the global financial crisis earlier this month, places like Melbourne and Sydney bore the brunt falling by 1.2% and 1.8% respectively. According to the ABC, capital cities across the board fell a collective 0.9%.
This marks the second time APRA has had to lower lending restrictions this year. After removing a 2014 imposed cap that kept investor credit growth under 10% each year back in April.
APRA changes won’t do much for property prices
APRA’s chairmen commented on the decision, saying:
‘APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary.
‘Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.’
APRA also pointed out the success of holding to ‘sound lending practices’, which has led to a market reduction in the amount of new interest-only lending, and is now coming is well under the 30% benchmark.
But the APRA’s recent change might not have the impact on property prices that you would like to think.
An analyst from CoreLogic’s head of research, Cameron Kusher expects that the changes wouldn’t be ‘monumental’, telling ABC news:
‘If you look at lending to interest-only borrowers, it’s [already] sitting at about 16.5 per cent of new lending, when the cap is 30 per cent.
‘What it might do is make it easier for people who are coming to the end of their interest-only mortgages — or are getting into financial hardship — to refinance with a normal lender, without going to the non-bank sector.’
It also suggests that borrowers could see the upside of cheaper interest-only loans according to Sally Auld, JP Morgan’s chief of economics.
However, she did dampen that thought by going on to say:
‘Interest-only loans were repriced quite significantly [higher] in the wake of this regulation, so there will likely be some reduction in rates for these loans…
‘But with dwelling prices still falling … and lending standards tighter, marginally lower rates will unlikely result in a quick acceleration in interest-only lending.’
What lax lending means leading into 2019 property market
APRA’s announcement is a bit unusual in a number of ways, firstly the timing — coming out before the final report is released. And again, it’s kind of a Band-Aid over a bullet whole fix.
But Mr Kusher thinks any major changes to credit lending and housing market at far, will happen once the Banking Royal Commission issues its last report in February 2019.
Mr Kusher left investors with some holiday spirit, even if it was tact:
‘Maybe it’s just a case of APRA wanting to provide some good news to the market before Christmas’.
For Markets & Money
PS: Want to know how you could weather the Downturn in Australia’s property market? Economist Harry Dent reveals in his free report: ‘Two Rules for Surviving a Potential Property Collapse’.